Overview

Retirement accounts (IRAs, 401(k)s, SEP/SIMPLE plans, and Roth accounts) offer tax benefits but also come with rules that change over time. Mistakes can occur both before retirement (contributions and rollovers) and after (withdrawals and Required Minimum Distributions). In my 15+ years advising clients, the most costly errors are usually avoidable with a few targeted checks each year.

This article covers the common tax mistakes to avoid, the IRS rules you need to know, and practical steps to reduce tax surprises.

Sources: IRS retirement-plan guidance (see IRS Retirement Plans and RMD FAQs) and SECURE Act 2.0 changes. See the IRS for the most current rules: https://www.irs.gov/retirement-plans.

Common pre-retirement tax mistakes

  1. Misunderstanding contribution limits and income phase-outs
  • Why it matters: Overcontributing to IRAs, Roth IRAs, or employer plans can trigger excess contribution taxes (typically 6% per year on the excess amount) until corrected. Income limits can also block direct Roth contributions for higher earners.
  • How to avoid: Reconcile contributions early in the year and again before tax-filing. If you suspect an excess contribution, correct it as soon as possible (withdraw the excess plus earnings) and report per IRS guidance.
  • Helpful link: For Roth strategies and backdoor Roth options, see our guide on Roth-conversion strategies and backdoor Roths.
  1. Mishandling rollover and trustee-to-trustee transfers
  • Why it matters: Rolling money incorrectly (taking a distribution and redepositing it within 60 days) can be treated as a taxable distribution and may be subject to early-withdrawal penalties if you’re under age 59½. Employer plan rollovers to an IRA require careful handling to avoid withholding.
  • How to avoid: Use direct trustee-to-trustee rollovers when moving 401(k) balances to an IRA or to a new employer plan. If you receive a distribution, be mindful of the 60-day rollover rule and the withholding that may have been applied.
  • Internal resource: See our article on how to roll over retirement accounts without tax surprises for step-by-step advice.
  1. Forgetting employer-plan nuances (Roth 401(k), employer match taxation)
  • Why it matters: Employer matches go into traditional (pre-tax) buckets even if you contribute to a Roth 401(k). That means the match will be taxed on distribution unless rolled to a Roth properly through a conversion that triggers tax.
  • How to avoid: Confirm plan rules with HR and the plan provider. Track the tax status of each bucket (pre-tax vs. Roth) separately.
  1. Failing to use catch-up and other age-based opportunities strategically
  • Why it matters: After age 50, catch-up contributions let you save more, often with a large tax benefit. But special catch-up rules for high earners (e.g., Roth catch-up contributions for certain high-income catch-up pay) or employer plan changes may apply.
  • How to avoid: Review catch-up limits and plan documents annually and consult a plan administrator before changing contributions.

Common post-retirement tax mistakes

  1. Missing Required Minimum Distributions (RMDs) or misunderstanding the RMD rules
  • Why it matters: Failing to take an RMD from traditional IRAs and most employer plans can trigger an excise tax. Under changes made by the SECURE Act 2.0, the RMD age moved to 73 for many account holders starting in 2023; planned increases push the age higher in future years for some taxpayers. The excise tax for missed RMDs has also changed: recent law reduced the default penalty from 50% to 25%, and to 10% if the distribution is corrected promptly (see the IRS RMD FAQ page for details).
  • How to avoid: Start RMD planning well before the first required year. Maintain a schedule, coordinate between multiple accounts, and consider qualified charitable distributions (QCDs) to meet all or part of your RMD while reducing taxable income. For deeper RMD strategy, see our RMD guides including Required Minimum Distributions (RMDs) Demystified and RMD strategies and timing.
  1. Poor sequencing of withdrawals across account types
  • Why it matters: The order in which you take money from taxable accounts, tax-deferred accounts (traditional IRAs/401(k)s), and tax-free accounts (Roth IRAs) affects lifetime tax bills and exposure to Medicare IRMAA surcharges.
  • How to avoid: Model multiple withdrawal sequences. For example, taking small Roth conversions in low-income years can reduce future RMDs and taxable income. Coordinate Social Security claiming and conversions to minimize tax bracket creep.
  • Internal resources: See our posts on Roth conversion strategies and withdrawal sequencing between taxable, tax-deferred, and Roth accounts.
  1. Ignoring the interaction with Social Security and Medicare
  • Why it matters: Large distributions can increase your provisional income and push up Medicare Part B and D premiums (IRMAA) or taxability of Social Security benefits.
  • How to avoid: Project taxable income for the year before large distributions or conversions. Consider partial Roth conversions in years with naturally low income (e.g., pre-Social Security, pre-RMD).
  1. Not using charitable strategies when appropriate
  • Why it matters: Qualified charitable distributions (QCDs) allow IRA owners age 70½ or older (prior rules; check current age thresholds per IRS guidance) to direct up to a defined annual amount from an IRA to charity and have it excluded from taxable income while satisfying RMDs.
  • How to avoid: If you plan to donate and you have RMDs, work with your custodian to arrange QCDs before year-end. Confirm QCD eligibility and limits with the IRS.

Other costly mistakes

  • Treating Roth rollovers and conversions carelessly: Large, unplanned conversions can spike taxable income and move you into a higher bracket. Use partial conversions over several years.
  • Failing to update beneficiary designations: Retirement accounts pass by beneficiary designation and do not follow a will. Mistakes can cause tax surprises for heirs.
  • Overlooking state tax rules: State income tax treatment of distributions and rollovers varies. Some states tax Roth distributions differently; some have inheritance or estate taxes.

Practical compliance and tax-savings checklist

  1. Yearly review (Q4) with your advisor or tax preparer: Contribution levels, catch-up eligibility, and expected taxable income for the coming year.
  2. At job change: Initiate a direct rollover to avoid withholding and tax headaches.
  3. Age-71–73 planning: Confirm RMD ages that apply to you; prepare a distribution plan before the first required year.
  4. Roth conversion windows: Identify low-income years for partial conversions to smooth taxable income.
  5. Document everything: Keep confirmations of rollovers, QCD letters, and 1099-Rs with your tax records.

Real client examples (anonymized)

  • Late RMD penalty avoided: A client discovered in mid-year they had not taken their first RMD. By coordinating with custodians and taking the RMD plus documenting a timely correction, we reduced exposure and avoided the higher uncured excise tax.

  • Bad rollover fixed: A client rolled an old 401(k) to an IRA by withdrawing funds and redepositing within 60 days. Because the plan withheld 20% for taxes, the client faced a taxable event. We fixed this by asking the plan to recharacterize the withholding where possible and by replacing the withheld amount from other funds to complete the rollover.

Frequently asked questions

Q: What is the current RMD age?
A: The RMD age rose to 73 for many taxpayers beginning in 2023 under SECURE Act 2.0; planned future changes will raise it further for later cohorts. Confirm your specific RMD start year on the IRS RMD FAQ page.

Q: How big is the penalty for missing an RMD?
A: Recent law reduced the excise tax on missed RMDs (see IRS guidance): the standard excise tax is now generally 25% of the shortfall, reduced to 10% if corrected in a timely manner. Always check the current IRS guidance or consult a tax professional.

Q: Are Roth conversions always good?
A: Not always. They make sense as a tool to manage future taxable income and reduce RMD exposure, but conversions generate current-year tax. Plan conversions around expected income and marginal tax rates.

Action steps you can take today

  • Pull recent plan statements and confirm contribution history for the past three years.
  • Set calendar reminders for RMDs and year-end QCD eligibility.
  • Schedule a short review with a CFP or tax professional before making large withdrawals or conversions.

Where to learn more

Professional note and disclaimer

In my practice I see the same small oversights—missed RMDs, forgotten beneficiary updates, and poorly executed rollovers—cause outsized tax bills. This guide is educational and not a substitute for personalized advice. Rules change; check the IRS links above and consult a qualified CPA or CFP for decisions affecting your taxes and retirement income.

Sources and further reading: IRS Retirement Plans guidance; Consumer Financial Protection Bureau articles on retirement planning; SECURE Act 2.0 summaries.